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S. Vaidya Nathan

INVESTMENTS can be considered in the stock of Essar Shipping at price declines from the present level of Rs 25.

With volatile trends in equity prices across the board and the possibility of a further decline, it may better to capitalise on any price weakness to take exposures. Shareholders can remain invested as the performance over at least the next couple of quarters point to continued buoyancy in earnings.

This stock is appropriate for investors with a penchant for high risk as concerns relating to corporate practices and intra-group investments and guarantees, that have acted as drag on the valuation of the group company stocks, remain.

The steady rise in interest cost in an environment of declining interest rates also highlights the risk aspect.

In the past couple of years, a host of companies managed to reduce their interest cost substantially by pre-payment and replacement of high-cost funds. Essar Shipping has, however, had limited success.

Impressive show

Capitalising on the firm trend in the dry cargo and tanker freight market, Essar Shipping has performed impressively in the first three quarters of FY-04.

A growth in revenues of about 25 per cent and expansion in operating profit margins by at least five percentage points are likely to ensure a quantum rise in post-tax earnings compared to FY 03.

There may be a sizeable scaling up of earnings over the next few quarters, especially in the January-March period.

Driven by strong demand for iron ore, coal, steel and grains, dry cargo freight rates have further firmed up over the past couple of months; the higher freight levels appear set to prevail over the next six months.

The tanker freight market has also shown a firm undertone, driven by higher demand for oil products due to an intense winter in North America. Even if tanker freight rates decline after the seasonal effect wears out, they are likely to settle at levels that would still ensure healthy revenue growth.

Essar Shipping's contemporary tanker fleet that complies with the new stringent norms prescribed by the International Maritime Organisation — its tanker fleet is double hulled and a couple of them have also secured approval for compliance with tighter security norms — should ensure their continued acceptance at attractive market-related rates. The exit from the offshore supply business in which the company had a marginal presence also augurs well.

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